Normalization of Income: Where Business Valuation Meets Forensic Accounting
Reviewed by Momizat on
Dec 21.
Normalization of Income: Where Business Valuation Meets Forensic Accounting At the Legal Intelligencer blog, Terry Silver explains that since buyers and sellersNormalization of Income: Where Business Valuation Meets Forensic Accounting At the Legal Intelligencer blog, Terry Silver explains that since buyers and sellers
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Normalization of Income: Where Business Valuation Meets Forensic Accounting

Normalization of Income: Where Business Valuation Meets Forensic Accounting

At the Legal Intelligencer blog, Terry Silver explains that since buyers and sellers often have differing ideas of a business’ true fair market value, normalization is usually a required part of any M&A deal:

The valuation of virtually every closely held business requires normalization adjustments. Although these adjustments may be made to either the balance sheet or the income statement, the most common normalization adjustments are imposed upon the income statement. The International Glossary of Business Valuations Terms defines â€śNormalized Earningsâ€ť as â€śthe economic benefits adjusted for non-recurring, non-economic, or other unusual items to eliminate anomalies and/or facilitate comparisons.â€ť

As closely held businesses are controlled by one or just a few individuals, the valuation analyst should consider whether the economic benefits being paid to its owners are above, below or at market levels. Sometimes the analyst can easily identify which items require normalization and at other times the analyst is left to his or her own devices to identify the income normalization issues.

The International Glossary of Business Valuations Terms defines â€śFair Market Valueâ€ť as â€śthe price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at armâ€™s length in an open an unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.â€ť Both the hypothetical buyer and seller base their respective value estimates on the anticipation of the entityâ€™s true economic income. Normalization may be required to adjust to the true economic income.

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The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.